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Hawkish Fed Comments Undermine Reflation Narratives

December 01, 2021


A sharp selloff across commodity markets has coincided with a contraction of future inflation levels implied by US Treasuries.

ChartA sharp selloff across commodity markets has coincided with a contraction of future inflation levels implied by US Treasuries.

The final days of November featured successive shocks for US financial markets.

Concerns over the emergence of the Omicron Covid variant were digested rapidly, with the price of most risk assets rebounding after an initial selloff during light holiday trading volume. FOMC Chair Powell’s hawkish comments before the Senate Banking Committee on Tuesday, however, caused a second sharp selloff for equities and commodities. That selloff stretched a second day into December, coinciding with further flattening of the US yield curve.

On Wednesday, the Federal Reserve’s Beige Book release noted business operators expect current supply chain disruptions to extend well into 2022. Critically, most respondents in the survey also indicated that they had raised prices to customers in response to higher overhead.

Seeing signals that elevated inflation will persist into coming quarters and that Federal Reserve policymakers are prepared to take faster action to remedy it, some investors appear to have concluded, for now, that the reflation narrative has paused.

Key Points

  • The US Treasury yield curve has continued to flatten in recent sessions, with the spread between 10Y and 2Y yields now approaching the lowest level since Q1 of this year.

  • Inflation breakeven levels extrapolated from US treasury markets have retreated significantly, with ten-year levels at multi-month lows.

  • Commodity prices have retreated sharply in recent trading sessions, led in part by tumbling oil prices.